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Xi's common prosperity becomes financial black box - Reuters

The logo of Alibaba Group is seen during Alibaba Group's 11.11 Singles' Day global shopping festival at the company's headquarters in Hangzhou, Zhejiang province, China, November 10, 2019. REUTERS/Aly Song - RC2G8D9506GL

HONG KONG, Sept 3 (Reuters Breakingviews) - President Xi Jinping's "common prosperity" is turning into a financial black box. Alibaba (9988.HK) and Tencent (0700.HK) have each pledged $15.5 billion to the Chinese president's cause to ease inequality. Investors, though, are in the dark on how these huge sums will be deployed.

The $470 billion Alibaba on Friday became the latest to jump on the altruism bandwagon. Following similar announcements from compatriots Tencent, Pinduoduo (PDD.O) and others, the e-commerce giant will by 2025 spend 100 billion yuan, roughly two-thirds of the group's earnings in the last fiscal year, on 10 initiatives including helping small businesses, upgrading technology and healthcare infrastructure in less-developed areas, and protecting gig-economy workers.

The move checks off a list of corporate good deeds that should please Beijing. Besides regulatory crackdowns in technology, property and other once-freewheeling private sectors, officials fretting about low birth rates have set their sights on "excessively high" incomes, expensive tuition fees, high housing prices and other societal ills.

Corporate social responsibility is welcome. The problem is, outsiders have limited visibility into how shareholder earnings will be used. Alibaba's initiatives, which the company says will be managed by a working committee led by boss Daniel Zhang, look like a blend of research and development costs, increased overhead expenses, new businesses and additional subsidies, as well as traditional charitable and philanthropic donations. Adjusted EBITDA margins have already been falling, to 24% in the three months to June from 33% a year earlier, on the back of investments into "key strategic areas".

The bigger risk is that these pledges are not one-off costs. Authorities may soon revoke preferential tax treatment for many companies once considered to be high-tech. Analysts at Citi reckon applying the standard 25% blended rate to video-games maker Tencent from this year’s second quarter would shave off roughly 9% of adjusted annual earnings in both 2022 and 2023.

More frequent regulatory fines for anti-trust breaches and other infractions, as well as a raft of new requirements on data and consumer privacy will also dent profit margins. The cost of doing business in the People’s Republic isn’t just going up - it’s fundamentally changing.

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CONTEXT NEWS

- Chinese e-commerce company Alibaba on Sept. 3 said it will invest 100 billion yuan ($15.5 billion) by 2025 in support of President Xi Jinping's "common prosperity" initiative. The initiative was first reported by the government-backed Zhejiang News website.

- The funds, which will be managed by a newly established task force under the direction to Chairman and Chief Executive Daniel Zhang, will go towards technology innovation, economic development, high-quality employment, and care for vulnerable groups. A "common prosperity" fund of 20 billion yuan will also be set up to “help cut inequality” in Zhejiang, Alibaba’s home province.

- Separately, video-games company Tencent on Aug. 18 said it would invest 50 billion yuan to promote "common prosperity" in China, adding to an April pledge of 50 billion yuan.

Editing by Antony Currie and Katrina Hamlin

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